Why Phones 4u needs to cut costs

Phones 4u’s store changes this week have been interpreted by some as a worrying sign that the retailer is in trouble.The decision to take a harder, hungrier, back-to-basics approach is the right course. If anything it could have come earlier. But it seems a sticking plaster to a bigger problem.The business has been built around the sale of contracts to a young, male segment of the market, through some very focused marketing. And it worked.

More recently, the market for new mobile subscribers has been in freefall, and the squeeze on independent mobile retail has increased. Phones 4u’s plans to diversify into new categories such as gaming, or expand overseas have never materialised. The retailer looks and feels the same today as it did when Providence Equity Partners coughed up £1bn for the business in 2006. It has grown its online and direct operation, and built up a healthy insurance business, but Phones 4u has done very little to slash its costs (aside from a small degree of back-office outsourcing) in line with the dramatic fall in its core market – mobile phone contracts.

The company appears to be in very capable hands. Many view Tim Whiting and Phil Dobson as among the sharpest in the industry. Whiting secured long-term commitments from operators to ensure some stability for the company. The future nevertheless looks uncertain.

Providence is understood to have banked its return on its initial investment (something of an achievement for a private equity company at the moment), but where the retailer will go next for growth is not immediately apparent. The ambition of Providence and the Phones 4u management is unclear, but the necessity to adapt the cost base and look for new areas for revenue couldn’t be clearer.